How Macquarie got TPG's capital call done

The unique capital raising case study isn’t the focus of this case, but it is spectacular sideshow that could reverberate for some time.

Sep 12, 2019 — 4.18pm

In his rush to paint TPG Telecom executive chairman David Teoh as a maverick entrepreneur, desperate to build a mobile network at almost any cost, the competition regulator’s silk Michael Hodge, QC, has given us a rare look inside the way the capital-raising sausage is made.

Perhaps big institutional investors know just how fluid the assumptions that underpin such deals can be. But for the rest of us, it’s a bit of a shock.

TPG boss David Teoh is hoping the Federal Court overrules the ACCC. David Rowe

Hodge went hard at Teoh in his second day on the stand, trying to pin him down on the origins of his plan to become Australia’s fourth mobile network operator, competing with Telstra, Optus and Vodafone Hutchison Australia.

It is the latter company that TPG now wants to merge with; the pair have come to the Federal Court hoping to get the Australian Competition and Consumer Commission’s opposition to the merger overturned.

That opposition rests on the idea that if TPG and Vodafone aren’t allowed to combine, then TPG will have no choice but to resurrect its plans to build a 4G mobile network. If it doesn’t build that network, the ACCC argument goes, then it simply won’t be able to compete effectively.

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Hodge’s mission on Thursday was to show that Teoh was so desperate to get into the mobile network back in 2016, 2017 and 2018 that he was willing to take what now seem like crazy risks. The implication being that Teoh’s reasoning from that period could also have to apply if TPG’s merger with Vodafone were blocked.

Hodge painted a picture of an entrepreneur singularly focused on getting his network up. TPG’s small board approved the purchase and pursuit of chunks of mobile spectrum without seeing formal, specific business cases for these deals, for example.

But Teoh said the necessary analysis to support these deals – including the $1.2 billion acquisition of some spectrum in April 2017 – was done and the board was fully informed, regardless of the lack of documentation.

“I have the trust of my board. So that is a very important factor,” Teoh told the court. “The board could see the opportunity as well, in mobile. As I told them, the future is mobile.”

Rapid-fire changes

Teoh’s desperation, Hodge argued, extended to making rapid-fire changes to the assumptions underpinning the financing of that $1.2 billion spectrum bid.

On April 6, 2017, the board approved Macquarie to raise $400 million to help pay for the deal.

But Teoh said there was a snag. At the time, TPG's internal financial modelling showed its proposed network had a negative net present value of about $288 million.

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Macquarie, Teoh told the court, wanted a positive NPV before it hit the market to rattle the tin.

So at a TPG board meeting the next day, on April 7, 2017, directors were presented with a financial model that had been tweaked.

The monthly customer assumption had gone from 45,000 to 60,000. The weighted average cost of capital went from 10 per cent to 8.3 per cent. The time horizon of the model went from seven years to 12 years.

A few other tweaks were made to make the model more conservative, too, with the number of sites in the network increased to push the costs of rolling it out a bit higher.

But the overall result met Macquarie’s request. The NPV was now positive $779 million.

Macquarie and TPG got its capital raising away, with the institutional portion ($320 million of the $400 million) priced at $5.25 a share, a discount of 19.7 per cent to the stock’s previous close.

Negative sentiment

But Teoh said it was a hard raising. There was some negative sentiment in the market about the cost of the spectrum and the two biggest shareholders – Teoh himself and Washington H Soul Pattinson – were required to buy their full whack of shares.

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But the investors who bought into the deal could not know of the last-minute tweak to the financial model.

Looking back at the investor presentation issued when the capital raising was announced, there is no mention of the customer assumptions, the cost of capital assumptions and the changes in time horizons. There is, however, a mention of the number of sites required to make the network function.

The absence of these numbers is not surprising – they are incredibly commercially sensitive, particularly given the intense competition in the mobile market over decades.

But given what we know now – that is, that TPG says the mobile network rollout is dead in the water, due in part to the government banning its equipment supplier Huawei from the 5G market, but also, crucially, to the changes in the economics of the market – investors are entitled to ask whether TPG’s work around its capital raising was really rigorous enough.

Assumptions can change over the course of a project. But should they really change so swiftly, for such a huge project?

The unique capital raising case study isn’t the focus of this case, but it is a spectacular sideshow that could reverberate for some time.

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James Thomson is a Chanticleer columnist at The Australian Financial Review based in Melbourne. James was previously the Companies editor and the editor of BRW Magazine. Connect with James on Twitter. Email James at j.thomson@afr.com